Here's who got Alaska into this public employee retirement mess

JUNEAU -- Legislators struggling to find ways to pay off the $12 billion in unfunded pension liability threatening to overwhelm state budgets for years to come are trying to finger who is responsible and where the blame lies.

Huge stock market declines, devastating actuarial errors, and funding decisions of more than a decade ago all played a role. But those in current state leadership posts watched in recent years while unfunded liability grew to is current size, failing to take action even after awareness of the shortfall grew.

The first response from state leaders, including then-Gov. Frank Murkowski and legislative leaders, was to blame the newly discovered unfunded liability on the state's traditional defined-benefit retirement plan for public employees and teachers.

The Associated Press reported at the time it amounted to between $5.7 and $6.2 billion.

In response, Alaska switched to a new "defined contribution" or 401(k)-style retirement plan for all employees hired after July 1, 2006. "We think this change will stop the so-called bleeding," Murkowski said at the time, also reported by the AP.

The unfunded liability is now estimated at $11.9 billion for the combined Public Employees' and Teachers' Retirement Systems.

That switch was a mistake, says Rep. Mike Hawker, R-Anchorage.


"I very much was concerned when we closed our retirement systems and went to a defined-contribution that by closing those systems we were going to find ourselves in the position we are in today, which was ultimately having to step in with a significant financial bailout."

Gov. Sean Parnell has proposed taking a modest step to alleviate future retirement costs by paying an extra $2 billion along with the regular annual $1 billion contribution to pay down the unfunded liability, but has found legislators reluctant to take money off the table that they say they'd prefer to have available for other things.

"I really think we really could have worked through this and not been in such dire circumstances if we hadn't made that decision then," Hawker said, as new employees no longer help pay into the underfunded plans.

One of the reasons for the original unfunded-liability amount was bad actuarial projections provided by Mercer Inc., an actuarial consulting firm owned by Marsh & McLennan, the huge insurance brokerage. When Mercer discovered the errors, the state later said, it hid them and knowingly provided bad data the following year as well. State officials said the loss to the state amounted to $2.5 billion of the unfunded liability.

The Alaska Department of Law sought millions from the Legislature for a lawsuit against Mercer, and Marsh & McLennan's deep pockets, but found the legislators reluctant. If the case is so good, they were told, get a law firm to take it on contingency.

That's what finally happened, and state attorneys said the New York law firm that was hired did stellar work. While Mercer denied the allegations, it eventually agreed to pay a unprecedented half-billion dollar settlement to Alaska rather than going to trial. Legal fees and expenses took $97 million of the $500 million settlement.

Sen. Johnny Ellis, D-Anchorage, called that "an almost scandalously low settlement."

And that's just one of the areas where the state was running up pension costs by not paying those costs as it went.

"I was there watching so-called fiscal conservatives under-fund our obligations to our retirement systems," he said.

That was something that Mercer's lawyers pointed out during the lawsuit, state officials said, and they claimed that Mercer wasn't the cause of the unfunded liability because even if they'd given Alaska more accurate information, there's no evidence that the state would have acted on it.

Alaska's actions since the lawsuit may indicate that's true.

The legislation that changed the Alaska public pension system in 2006 also created a unified Alaska Retirement Management Board to oversee the state's retirement trust funds, and monitor their funding levels. The system has done that, including hiring consulting actuaries to watch over its principal actuaries, and scrupulously documenting the growth of the unfunded liability.

With fully-funded pension trust funds, future benefits are not paid only by annual contributions but also by earning investment profits, expected to be about 8 percent a year over the long term.

Sen. Bert Stedman, R-Sitka, was one of those who began advocating for cash infusion into the trust funds to boost those earnings. He began years ago when he was co-chair of the Senate Finance committee. At the time neither the governor nor sufficient numbers of fellow legislators supported the call. That's meant the trust fund was unable to earn the required 8 percent each of those years, let alone the actual, much-higher returns of the big stock market gains in recent years.

"I think we'd have about a billion dollars more," if we'd made the $2 billion contribution when first proposed, Stedman said.

Now, years later, Parnell is backing a $2 billion cash infusion, but is finding some legislators still reluctant. In the House, Rep. Bill Stoltze, R-Chugiak, co-chair of the Finance Committee, stripped the retirement money Parnell included in the operating budget, and just recently said Parnell should have instead submitted a bill making extra payment.

Stoltze proposed a radical plan going the other direction, using the existing trust fund to subsidize payments and shifting long-term costs to future legislatures, though that plan faltered in the full House.


This week, Parnell submitted the bill Stoltze asked for, passing the ball back to the Legislature.

The governor may find his plan to shore up the retirement system facing better prospects in the Alaska Senate than similar plans in recent years. Influential Rep. Anna Fairclough, R-Anchorage, said even more needs to be done. "We do need to make a large cash infusion," she said. She said this week that while she's not ready to make her proposal public yet, she's looking at putting an extra $4 billion contribution toward retirement.

Democrat Ellis said those costs today are far higher than they need to be because of past under-funding.

"Some of us sounded the alarm bells and were relegated to the back bench and weren't paid attention to, and now the chickens are coming home to roost," he said.

Contact Pat Forgey at pat(at)alaskadispatch.com